According to Bank of America Research Analyst Timna Tanners, Steelmageddon looms on the horizon due to massive planned capacity increases in the U.S. steel industry.
Her analysis indicates the equivalent of around a 20% capacity increase when aggregating investments across companies and production methodologies over the next few years. Due to the massive ramp-up, the Steelmageddon theory predicts 2022 or so as the time when we may see greatly suppressed prices, and therefore rampant mill closures, due to a steel supply glut in the U.S.
Meanwhile, in recent years, the Chinese government policy for the steel industry focused on capacity reduction and shutting down outdated plants. These closures resulted in an estimated reduction of 300 million metric tons of China’s steelmaking capacity.
In addition to these outdated blast furnace steelmaking facilities closing during the past few years, others still in operation face ongoing production restrictions during pollution alert periods. While some outdated capacity closed, other facilities with the latest technology brought new capacity onstream.
This “upgrade strategy,” if we could call it that, could have profound ramifications.
This morning in metals news, the Canadian government announced it is rolling out $100 million in funding for its domestic steel and aluminum industries, copper moves toward a seven-month high, and Vietnam’s steel exports to the U.S. increased in 2018.
The Canadian government has announced it will offer $100 million in funding to small- and medium-sized aluminum and steel firms in the country, the CBC reported.
The U.S.’s Section 232 tariffs on steel and aluminum remain in place for NAFTA partners Canada and Mexico. Those tariffs are the primary point of contention as the successor to NAFTA — the United States-Mexico-Canada Agreement (USMCA) — still needs to be ratified by the three countries’ legislatures.
According to the World Steel Association, global crude steel production rose 1.0% year over year in January, down from 3.8% growth in December. Global steel production in January hit 146.7 million tons (MT).
Crude steel production growth for China (in red) and the world. Source: worldsteel.org
As usual, China led the way in crude steel production, churning out 75.0 MT, marking a year-over-year increase of 4.3%. India, which recently passed Japan as the world’s second-largest steel producer, produced 9.2 MT, which was down 1.9% year over year. The country India passed in the steel production standings, Japan, saw its production fall 9.8% to 8.1 MT, while South Korea’s production fell 1.5% to 6.2 MT.
The U.S. produced 7.6 MT in January 2019, marking an 11.0% year-over-year increase. U.S. steel mills continue to fill an incrementally larger share of total capacity. According to the American Iron and Steel Institute, U.S. steel mills churned out steel at a capacity utilization rate of 80.9% through Feb. 23 of this year, up from 75.7% for the same period in 2018.
By tonnage, U.S. steel mills produced 14.6 million net tons in the year through Feb. 23, which marked an 8.0% increase over the same period in 2018.
In Europe, Italy’s crude steel production fell 3.6% to 2.0 MT, which France’s dropped 9.7% to 1.2 MT. Spain also produced 1.2 MT, marking an increase of 5.9%.
Crude steel production in Ukraine hit 1.9 MT, down 4.9%, while Brazil’s crude steel production rose 2.3% to 2.9 MT.
Turkey’s steel sector continues to face challenges, with 2.6 MT in January marking a 19.5% year-over-year decline. Turkey’s steel remains subject to the U.S.’s Section 232 steel tariff, which the Trump administration increased to 50% from 25% last year amid diplomatic tensions. In addition, another Turkish export market, the E.U., recently imposed new steel safeguards in an effort to curb diverted steel supplies (which it sees as an outcome of the U.S.’s Section 232 action).
The Chicago Mercantile Exchange (CME) hot-rolled coil (HRC) steel futures market finally demonstrated increased liquidity during 2018, about five years following its introduction in February 2014.
Both volume of trading and open interest numbers showed improvement during 2018, as evidenced by increasing trade volumes throughout the year. Additionally, the London Metal Exchange (LME) introduced a new Hot Roil Coil contract.
As a result, there’s been quite a bit of excitement and coverage lately of the HRC futures market — is it warranted?
Looking at Chart 1, since January 2018 or so, the CME HRC finally experienced an uptick in regular daily trading volumes, as demonstrated by the bars along the bottom of this daily settlement price chart.
Chart 1: Trade volumes are increasing, finally hitting a regular stride during 2018. Source: Quandl.com
The next chart also shows a positive sign for CME HRC futures. Open interest shown by the red line in the chart continues to trend upward, charted along with the daily settle price.
Chart 2: Open interest in CME HRC futures continues to increase. Source: Quandl.com
Have HRC Prices Moved Similarly to Other Steel Price Indexes?
Taking a full look back at prices of CME HRC against our own MetalMiner IndX(™) price tracking since the inception of the trading product, we see only small amounts of variability between historical MetalMiner IndX(™) HRC prices and CME HRC prices.
Chart 3: The MetalMiner IndX(™) U.S. HRC price versus the CME HRC close of day price, February 2014 to February 2019. Source: MetalMiner IndX(™) and Fastmarkets
Taking a closer look, the next chart focuses on the year 2014 from the CME HRC’s inception date.
As shown in the first couple of charts, the U.S. HRC price was fairly stable around 2014. Comparatively speaking, the CME HRC price was less stable (although it may have offered a speculative opportunity, as it tended to fall faster than actual prices).
Chart 4: The MetalMiner IndX(™) U.S. HRC price versus the CME HRC close of day price, 2014. Source: MetalMiner IndX(™) and Fastmarkets
Generally speaking, volatility increased in 2015, as the price dropped into December 2015. Thereafter, the price became more prone to fluctuations, but still traded mostly sideways in a band around the earlier price highs from 2013 and never returned to quite as low a price as it hit in 2015.
In early 2018, the price of HRC increased. Actual prices tracked by MetalMiner’s IndX(™) seemed less volatile than CME HRC prices. However, prices trended very similarly.
Chart 5: MetalMiner’s U.S. HRC price versus the CME HRC close of day price, 2018. Source: MetalMiner IndX(™) and Fastmarkets
What Does This Mean for Industrial Buyers?
The CME HRC futures liquidity amped up during 2018, the product’s fifth year on the market.
Volume and open interest increased. CME steel prices tended to follow a fairly stable trajectory, similar to what the major indexes report (e.g. CRU, TSI, Platts, etc).
Furthermore, large organizations with significant planning needs that buy in sizable volumes may benefit from the arbitrage play these contracts allow, as well as the overall benefits of using hedging instruments to lock in margins.
This morning in metals news, the U.S.’s Section 232 automotive investigation moves forward, Tokyo Steel announces its prices will remain steady next month and the copper price got a boost from an Indian Supreme Court ruling.
Section 232 Report Sent to the President
On May 23, 2018, the Trump administration initiated a Section 232 investigation to determine whether imports of automobiles and automotive parts are negatively impacting national security.
Pursuant to Section 232 of the Trade Expansion Act of 1962, Commerce Secretary Wilbur Ross then had 270 days to send the president a report with recommendations vis-a-vis the probe.
According to Reuters, Ross sent his report to the president Sunday, two hours before the close of the deadline.
Steady Steel
For the third month in a row, Tokyo Steel has opted to keep its prices steady, Reuters reported, citing a weaker overseas market and slower winter construction demand.
Per the report, rebar will remain at 69,000 yen ($624) per ton.
Court Ruling Boosts Copper
According to another Reuters report, the copper price got a boost after the Indian Supreme Court reversed an environmental court’s prior ruling that would have allowed a Vedanta copper smelter to reopen.
The smelter was closed last May after a protest over pollution from Vedanta’s Sterlite copper plant turned deadly; authorities fired on the protestors, resulting in 13 deaths.
Two major dam disasters in three years are enough to put the frighteners on investors and get the media abuzz with talk of supply-side shortages.
Yet as small as Vale’s production loss is, the fact remains the market is relatively tight, and supply is becoming an issue again after many years of plenty.
According to Reuters, the Corrego do Feijao mine shutdown will result in only a 1.5% production loss to Vale, hardly enough in itself to create a surge in the iron ore price to a four-and-a-half-year high of over $100 per ton last week.
The fear appears to be more about what comes next.
In the past few months, representatives of steel companies like Tata Steel and JSW Steel have met steel ministry officers with a request that the Indian government look at the present steel import-export scenario and impose duties.
According to a Reuters report, Indian domestic producers are facing not only the issue of cheap imports from China, Japan and some Southeast Asian countries, they are also been buffeted by low domestic prices.
Now, there are reports coming in that the steel companies are seriously contemplating increasing prices, which seems like a contrarian position since consumers have the option of buying cheap, imported steel. At the start of the present financial year, India had turned into a net steel importer for the first time in two years. By June, imports had increased by as much as 15%.
JSW Steel has already hiked the prices by over $100 per ton; others are thinking of following suit.
The reason? An increase in some raw material prices and growth in international steel prices. Indian companies have explained their proposed hike was to be in sync with rising international prices.
Imports, however, are what are causing Indian steel majors a major headache.
Imports of stainless steel from Indonesia, for example, has grown by nine times, according to the Indian Stainless-Steel Development Association (ISSDA). ISSDA also feels that countries like Indonesia, Malaysia and others are allegedly abusing the Association of Southeast Asian Nations (ASEAN) free trade agreement.
The steel ministry is sympathetic to the demands of local producers, and may be contemplating some measures to curb the situation.
But it’s not clear exactly what the government plans to do.
Some reports said the new measures may be more in the nature of non-tariff measures. It’s a case of once bitten, twice shy for India on this matter. In 2016, it lost a dispute against Japan at the World Trade Organization (WTO) on charges that New Delhi unfairly imposed import duties to safeguard its steel industry.
JSW Steel’s Joint Managing Director Seshagiri Rao was quoted last month as saying there was an urgent need to raise duties on steel imports, dubbing them a “major threat” to domestic industry.
With the February 2019 Monthly Metals Index (MMI) report, we can officially move past 2018 and begin to take a look at the world of metals thus far in the new year.
On the trade front, trade officials from the U.S. and China met in January for renewed talks on the ongoing trade standoff between the economic powerhouses. A March 2 deadline approaches, however, after which President Donald Trump had previously indicated the U.S. would up its tariff rate from 10% to 25% on a a wide variety of Chinese imports (worth approximately $200 billion).
However, this week the president indicated he might not stick to that March 2 deadline, which could allow for further negotiations between the two countries if the deadline were postponed.
Meanwhile, in the world of metals, seven of our 10 Monthly Metals Indexes (MMIs) made gains this post month, with the remaining three posting no movement.
A few highlights from this month’s round of MMI reports:
This morning in metals news, Big Three automaker Ford Motor Co. has expressed unease about the ramifications of a hard Brexit, Canada reverses a duty on some forms of steel from Mexico and India is considering pushing back a deadline after which more stringent steel import rules were set to go into effect.
With a Brexit deadline fast approaching in late March, it’s not surprising to see some businesses pondering the economic impact of a no-deal Brexit.
Ford Motor Co., for example, recently said if the U.K. is not able to secure a deal as it exits the E.U., the result would be “catastrophic,” the BBC reported.
Ford operates three plants in the U.K.: the Dagenham Engine Plant, the Halewood Transmission Plant, the Bridgend Engine Plant and the Dunton Technical Centre, employing a total of approximately 13,000 workers.
Canada Reverses Steel Duties on Forms of Mexican Steel
The reversal was effective as of Feb. 2, according to the report, and applies to Mexican energy tubular products and wire rod shipments.
India Mulls Deadline Pushback
As India aims to push domestic steel consumers to consume domestic steel, Reuters is reporting that a deadline for more stringent steel import rules aimed at automakers could be pushed back.
We have seen it in the U.S. While Europe would claim its own measures are a reaction to the impact of imports following the U.S. Section 232 action, the reality is domestic European producers — led by their trade group, the European Steel Association (EUROFER) — are very much in favor of the European Union’s decision to put in place permanent safeguard measures on steel imports (in place of the provisional ones which have been applied since July 2018).
The new measures differ from the provisional arrangements in part because they were arrived at after careful monitoring of imports in the intervening period. As such, they are so are more targeted, at some 26 product categories, Pan European Networks reports in its publication Government Europa. The tariff of 25% applies to imports that exceed a certain threshold and are designed to ensure sufficient supply is available to consumers without allowing the market to be swamped by excess material, severely depressing prices.
A report in Steel Times quotes Eurofer saying imports have surged by 12% last year, making the need for an effective defense mechanism essential.
Axel Eggert, director-general of EUROFER, is quoted as saying “For every three tonnes of steel blocked by the US’ section 232 tariffs, two tonnes have been shipped to the open EU market.”
The measures do appear to partially reflect consumers concerns, EUROFER says that the final measures include an immediate “relaxation,” increasing the size of the quota by 5% (calculated on the base years of 2015-2017), with a further 5% relaxation in July and another 5% in July 2020, subject to review. Steel demand in 2019 is expected to increase by just 1%.
But, not surprisingly, not everyone is in favor of the measures.
European auto manufacturers association ACEA has called the measures protectionist. It has said that steel exports to the United States have only dropped slightly, and so little extra steel has been diverted to Europe. EUROFER puts the figure at an increase from 20% import penetration historically to 25% import penetration during the monitored period last year – hardly the “significant volumes” touted by UK Steel Director General Gareth Stace.
If the U.S. reaches a sufficiently attractive trade deal that it decides to remove the Section 232 measures – unlikely, but a possibility – to what extent will Europe remove its new measures?
We will see. In an increasingly protectionist world, barriers are quick to be adopted and slow to be removed.
